Where’s the Love for ‘High Beta’?

By Brendan Conway

Niels C. Jensen of Absolute Return Partners, who published the chart, has this to say about it in his December investor letter:

Investors have not yet fully embraced this rally. They have invested in a ‘cowardly’ fashion, focusing on defensive, low beta stocks rather than more aggressive, often cyclical, high beta stocks (chart 11). If history provides any guidance, there will be a shift to more cyclical, higher beta names, before this rally is well and truly over.

That’s a good thing. But the trend has gotten to the point that low-volatility stocks are trading at richer price-earnings ratios than the S&P 500 of late, which is a switch from historical experience.

The trend shows up in the numbers behind PowerShares S&P 500 Low Volatility Portfolio (SPLV) and iShares MSCI USA Minimum Volatility ETF (USMV), two popular ETFs built for the more stable sort of stock investing.

Meanwhile, funds built for the opposite type of investing show P/Es about in line or below the broader index. That’s true for PowerShares S&P 500 High Beta Portfolio (SPHB), which trades for 15.7 times next year’s earnings, according to Morningstar — compare it to 16.55 times for SPDR S&P 500 ETF (SPY).

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